"HMRC has access to incredibly detailed information from sources such as the Land Registry and their own database within their CONNECT system. This allows them to effectively identify taxpayers it believes may have underpaid income tax, CGT, corporation tax or Annual Tax on Enveloped Dwellings (ATED)"
- Danielle Ford - HaysMac
The property industry has long been a key focus for HMRC, from restricting mortgage interest relief for individuals, abolishing favourable tax treatment for furnished holiday lettings, to tackling tax avoidance schemes. Recent tax reforms and a strong focus on enforcing compliance mean that HMRC will likely keep the property industry in its sights for the foreseeable future.
What are the legislative changes?
The Government’s 2024 Autumn Budget made several changes to the tax regime for property, all of which are intended to bring in more tax revenue.
Stamp Duty charges were increased with the threshold for relief for first-time buyers decreasing from £425k to £300k, taking effect from April 2025.
It also applied a new 2% rate for residential property purchases between £125,001 and £250,000, introducing an additional charge of circa £2,500. Further, the rate of Stamp Duty for those purchasing additional residential properties was increased from 3% to 5%.
The Budget also abolished the separate tax treatment for furnished holiday lettings (FHL), taking effect from April 2025. This has removed FHL’s tax benefits, including exemptions from finance cost restriction rules, capital allowances reductions and inclusion for income as net relevant earnings for pension relief.
Anti-forestalling provisions were introduced from 6 March 2024 to prevent a tax advantage being obtained through the use of conditional contracts.
Making tax digital (MTD) for landlords
Thousands more landlords are expected to be brought into the MTD regime after it was announced in the 2025 Spring Statement that MTD for landlords will be extended to those with qualifying income over £20,000 from April 2028.
This change is in addition to the thresholds of £50,000 qualifying income from April 2026 and £30,000 from April 2027 already announced. Qualifying income consists of either income from property or self-employment, or a combination of the two. The lower threshold in 2028 is therefore expected to mean that a very significant proportion of landlords are subject to MTD, if they were not already affected.
MTD broadly involves keeping digital records and submitting four quarterly tax returns in a particular tax year, followed by a final annual tax return, as opposed to the current system of one tax return per year. Many landlords will need professional advice to understand how they will be affected by MTD, as it requires specialist software that is not available via HMRC’s government gateway.
HMRC’s compliance crackdown
Whether the errors were inadvertent or deliberate, HMRC has identified the property industry as a contributor to the ‘tax gap’. Accordingly, it is now focused on taking action to increase compliance in the sector.
HMRC has access to incredibly detailed information from sources such as the Land Registry and their own database within their CONNECT system. This allows them to effectively identify taxpayers it believes may have underpaid income tax, CGT, corporation tax or Annual Tax on Enveloped Dwellings (ATED). In addition, HMRC have been issuing data holder notices to obtain details of landlords’ rental income from property management agents, highlighting the powers available to HMRC.
HMRC’s traditional compliance method is to open an enquiry in respect of a tax return to check that the declared rental profit is accurate. Where HMRC identifies underdeclared property income or gains, they could seek to charge a ‘deliberate’ behavioural penalty on the basis that the individual or company would have known the tax filing was incorrect or known that a tax filing was required. A deliberate penalty is HMRC’s most serious category for behavioural penalties and can range between 30%-70% of the tax, depending on the circumstances.
To reduce the HMRC resource required for dealing with enquiries, ‘nudge letters’ are being issued concerning matters such as gains which should have been reported, understated rental income or ATED. These are aimed at encouraging taxpayers to set their affairs in order, and HMRC appears to be sending more of these letters to those in the property industry.
There are also signs that HMRC is cracking down on tax avoidance schemes being marketed at the property industry. It recently targeted schemes involving hybrid partnerships and published Spotlight 63, which provides guidance to taxpayers that HMRC’s view is that such schemes do not work. If an alternative structure or arrangement is offered, especially if it results in less tax being payable overall, be sure to remain vigilant. If a tax scheme seems too good to be true, it usually is.
For those who receive a nudge letter or an HMRC enquiry, it is usually wise to seek professional advice. The high level of information HMRC now holds generally means that a communication received will be based on information which suggests tax has been underpaid.
To mitigate against the risk of being contacted by HMRC, it is best to review tax filings, or lack thereof, before being contacted by HMRC. If a mistake is discovered, making a voluntary disclosure to HMRC is the best course of action and will benefit from access to the lowest possible penalties, which in some cases are as low as 0%.
